Opinion: Central bank needs to think of economy down the road

WASHINGTON (MarketWatch) — There are lots of numbers to focus on in the jobs report, but the Federal Reserve should be focusing on the one former Federal Reserve Chairman Ben Bernanke pointed out all along: the unemployment rate. And that data point suggests the central bank should plan to lift interest rates this year, and not next as most of the policymakers are currently planning.

The Fed shouldn’t, and doesn’t, look at only one economic indicator. But the jobless rate is quite revealing because it combines in essence its two mandates — full employment and contained inflation — into one number.

The central bank has been saying since December 2012 that it’s worth keeping interest rates at basically zero “as long as the unemployment rate remains above 6.5%,” with a couple of other caveats. And in December 2013, they added a phrase that it will be appropriate to maintain the target rate “well past the time” the jobless rate falls below 6.5%.

So, by either guide post, we’re not there yet but we’re ultra-close: the jobless rate was 6.6% in January, down from as high as 10% in November 2009.

That’s considerable progress, even as it’s true that many have left the jobs force. For all the talk about the civilian labor force near 35-year lows (it ticked up in January), the fact is that 7.5 million jobs have been created since the jobless rate was at its worst level.

And why have people left the work force? A number of reasons, but in large part because the baby boomers are retiring. As the jobs market improves, some of the retired and discouraged workforce will re-enter the jobs market, but not a lot.

What will happen as the jobs market improves? Wages will rise. Admittedly, wage pressure is quite faint right now, but the broader, somewhat messy trend is that it is on an upward slope.

The Fed, when it conducts policy, needs to think more about the economy nine months down the road than the one it’s in right now. That’s why Bernanke, correctly, looked past energy price rises that he called “transient.” It’s why today’s policy, of zero rates along with bond purchases, is appropriate. The jobs market is still slack and is likely to be through most of this year.

But when the Fed meets on Dec. 16 and 17 of this year, the bond purchase program will likely have ended, and the jobless rate may be below 6%. Barring any major setback, the jobs market is on course to be back to normal next year.

There’s a body of thought that, since policymakers have for so many years convincingly failed in their mandate of full employment, they should be more tolerant of inflation when it comes back. That seems foolish — better to fight the war you’re currently in than the last one. And it’s worth noting that even a few rate hikes wouldn’t turn Fed policy into anything resembling a tight one — it would just be less accommodative than a zero interest rate situation.

Again, the current battle calls for the zero interest rate policy the Fed currently prescribes. But the upcoming one should lead to rate hikes faster than most at the central bank, and many in the market, expect.

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